SYDNEY
-- When Australian gambling tycoon James Packer and
his Hong Kong partner Lawrence Ho opened Macau's newest
casino in October, they made clear they were happy
to be meeting the wishes of China's leaders for more
family-oriented tourism in the fabled "Monte
Carlo of the East".

Their
$3.2 billion resort, Studio City, is full of attractions
based on Hollywood cartoon classics. Packer'scompanion,
the American singer Mariah Carey, sang, while Brett
Ratner, his partner in movie production, showed a
15-minute promotional film featuring Leonardo DiCaprio,
Robert De Niro and Brad Pitt, directed by Martin Scorsese.

Behind the scenes, though, Packer and Ho were disappointed.
Instead of the 400 gaming tables they were expecting
to operate -- until a few days before opening -- the
Macau authorities permitted just 250. The partners
were forced to enter into negotiations with their
lenders and two U.S.-based investment funds that own
a 40% share in the project.

Rival casino owner Steve Wynn, who will open a new
casino in Macau in March, said it was "preposterous"
that Packer and Ho could discover their table limit
only days before the opening.

After
more than a decade of permissiveness, China is trying
to moderate a gambling frenzy in the former Portuguese
colony, which returned to Chinese sovereignty in 1999
as a "special administrative region." As
a result, casino groups are looking further afield
for locales to attract the gamblers among Asia's new
rich, including those from China.

The golden years for casinos in Macau started two
years after Macau's transfer to China, with the expiry
of a 40-year casino monopoly enjoyed by Sociedade
de Turismo e Diversoes de Macau -- a gaming group
controlled by the legendary tycoon Stanley Ho, the
father of Lawrence and 15 other children.

Keen to show that China would not be a dead hand in
Macau, Beijing allowed the region to invite new players.
The first competing casino -- the Sands Macau, owned
by gambling mogul Sheldon Adelson's Las Vegas Sands
group, opened in 2004.

Macau was a zone of tolerance for the Chinese authorities,
exempt from the periodic crackdowns on money laundering
and capital flight that hit casinos across China's
borders in Myanmar, Laos and North Korea. It seemed
to be part of the Communist Party's deal with the
new business class: Leave politics to us, and you
can blow your money as you like.

Las Vegas-based Wynn and Hong Kong's Galaxy group,
which initially brought together Adelson with a Hong
Kong construction tycoon, got the first of the new
concessions to operate alongside Stanley Ho, bringing
in a multi-billion-dollar mix of glitzy accommodation
and entertainment. Las Vegas Sands later split off
from Galaxy under an ad hoc subconcession arrangement.

This pointed the way for the other concession holders
to divide their rights. Wynn Resorts sold a $900 million
subconcession in 2006 to a new joint venture between
Packer's 53.1%-owned Crown Resorts, which runs casinos
in Melbourne and Perth, and Lawrence Ho's Melco International
Development. Another of Ho's children, Pansy, teamed
up with MGM Mirage in a sub-concession from her father's
SJM Holdings.

For
Packer it seemed the best of all worlds. The saturnine,
tango-dancing Stanley Ho has been one of Beijing's
trusted capitalists. He and his late partner Henry
Fok were both members of the Chinese People's Political
Consultative Committee, an advisory body -- a sign
of their standing in Beijing. Yet by teaming up with
Lawrence Ho, Packer put a generation between himself
and allegations of organized crime on the peripheries
of Stanley Ho's casinos.

Who
dares to bet?

Their
Melco Crown Entertainment joint venture opened its
first Macau casino hotel, Altira, in 2007, the year
Macau surpassed Las Vegas in gaming revenue; a second
complex, called City of Dreams, soon followed. Packer
sold an Australian media empire built up by his late
father Kerry to place his main bet on gaming. Unlike
Kerry Packer, who was a famous "whale,"
or big better, in Las Vegas, James Packer is not a
player, except as a casino owner. Lawrence Ho does
not gamble, either.

Macau went on to have seven times the annual gaming
revenue of Las Vegas. But at the end of 2012, the
industry began to change. Xi Jinping, son of a revolutionary-era
People's Liberation Army marshal and foremost among
China's so-called "Red Second Generation,"
became Chinese Communist Party chief, and then president.
Within a year, he started an anti-corruption campaign
reminiscent of Mao Zedong's purges. Capital flight
intensified, reaching $150 billion for the month of
August this year, spurring tighter crackdowns on the
most visible exit route, Macau.

"Macau's
casinos became prime targets," said a senior
Hong Kong journalist familiar with Macau, who asked
to remain anonymous. "The government of Macau
is completely under the control of the communists,
like a mainland city. So mainland security organs
... have access to Macau bank accounts and videos
from the VIP rooms of the casinos. Who would dare
to bet there?"

The Chinese crackdown cut Macau's gaming revenue to
353 billion Macau patacas ($44.22 billion) in 2014,
from a peak of 361 billion patacas in 2013. In the
year to the end of September 2015, gambling spending
was 36% below the comparable period ending a year
earlier.

The result for Packer is that his Australian company's
34.3% share of Melco Crown's profit in the year to
July 2015, adjusted for abnormalities, fell by 57.6%
to 122 million Australian dollars ($xxx million).
Macau casino company shares have fallen sharply over
the past year, but have recovered from a low point
at the end of October amid signs that revenues may
be stabilizing on a monthly basis.

Beijing's grip is not relaxing. "The inherent
negative elements of this gaming economy have affected
social stability and security in Macau and even mainland
China," said Li Fei, a senior party official,
in a speech in December 2014. Xi has suggested that
Macau's economy should diversify away from gambling,
which was causing "deep-seated problems."

Officials have insisted that authorities will "strictly
follow" a policy of allowing only 3% annual growth
in gaming tables up to 2023 (when Xi's expected 10
years as party chief will have just ended).

However, international casino operators can expect
some compensation from wealthy Chinese gamblers moving
further afield. In its latest year, Crown Resorts
reported 41.8% growth in so-called VIP revenue at
its Australian casinos to A$956 million, out of total
revenue of A$3.2 billion, with a profit before tax
of A$916.5 million.

Crown plans new luxury hotel towers in Melbourne and
Perth for these mostly Chinese high-rollers, who sometimes
put up to half a million dollars on a single bet at
baccarat when they feel lucky, and has upgraded its
private jet fleet to shuttle them down.

Australia's state governments, keen to build up the
tourism and entertainment attractions of their capitals,
have been ready to help. Last year Victoria removed
a "super tax" on VIP revenue and extended
Crown's Melbourne license for 17 years, until 2050,
in return for an up-front payment to state coffers
of A$250 million and a further payment in 2033.

In New South Wales, former state premier Barry O'Farrell
announced a new "unsolicited proposal" process
that will allow Packer to insert a casino-hotel costing
around A$1.5 billion into Sydney's Barangaroo harbor-side
redevelopment.

Mixed
results

Further
afield the tycoon has had mixed results. He and Lawrence
Ho failed in a bid for one of Singapore's two casino
licenses in 2006. Melco Crown opened a $1.3 billion
City of Dreams casino in Manila this February, in
partnership with local tycoon Henry Sy, but a new
government in Sri Lanka has vetoed Packer's proposed
casino in Colombo. In Las Vegas, outside his joint
venture with Ho, Packer is planning a $4 billion twin-tower
casino resort, after a previous attempt at the U.S.
market failed. Lawrence Ho recently opened a casino
hotel in Vladivostok and is pursuing a project in
Spain to supplement his own ventures in Cambodia.

The biggest prize of all would be Japan, which allows
gambling only on a few public sports such as horse
and motorboat racing. However, annual spending on
vertical electronic pinball machines known as pachinko
is estimated at up to 20 trillion Japanese yen ($165
billion). Cash prizes are illegal, although non-monetary
prizes are sometimes exchanged for cash.

CLSA, a Hong Kong brokerage and investment firm, said
in a 2014 report that the latent demand demonstrated
by pachinko machines suggested that casino revenues
could reach $40 billion a year in Japan if 12 casino-resorts
were allowed to operate across the country. This would
be close to the peak revenue levels achieved in Macau.

Melco Crown was quick to see the potential, announcing
in September 2013 that it planned to invest more than
$5 billion in Japanese casino resorts if the law was
changed. "The potential is huge for integrated
resorts in Japan," Lawrence Ho told Bloomberg
in an interview at the time. "If Japan opens
up and allows integrated resorts in Tokyo, Osaka,
the market could easily be in excess of $10 billion
to $15 billion or more."

In May this year members of the ruling Liberal Democratic
Party introduced a bill in the Japanese Diet to authorize
preparation for licensing of "integrated resorts"
in time for the 2020 Olympic Games in Tokyo. Several
foreign casino groups have met politicians and officials
to discuss proposals, including Sands and MGM.

But there are serious political obstacles. The public
is deeply wary of yakuza (mobsters) and loan sharks
who lurk around pachinko addicts. A survey for the
Department of Health, Labor and Welfare last year
found that 4.8% of Japanese were "pathological
gamblers" -- a much higher rate than in other
countries where similar research has been done.

The LDP's coalition partner Komeito is deeply opposed
to the bill, which has failed to make parliamentary
progress, generating widespread skepticism about its
chances of becoming law in time for casinos to open
in 2020. Nevertheless, Prime Minister Shinzo Abe seems
keen for Japan to liberalize its gambling law in the
longer term, as are other conservatives. "Many
LDP Diet members are backing the casino bill,"
said political commentator Hideaki Kase.

In an interview with the Nikkei and other Japanese
media organizations in October, Lawrence Ho seemed
resigned to a long wait."Melco Crown is only
interested in markets that are big enough for us to
build integrated resorts," he said. "Japan
is certainly one of them, so we would be very interested
and we have been very patient as well. We understand
the Japanese government has to go through various
debates. But we are willing and ready."